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Controlling costs 7 min read

How your business can optimize costs to prevent falling margins

Successful business owners review costs on a regular basis to make sure their business is operating as efficiently as possible. Follow our steps to optimize your costs and maintain your profitability.

Are rising supplier costs, supply chain delay and higher interest rates creating cost creep? All business owners need to be aware how small increases across a range of expenses can make a big impact. Here, our experts lay out 6 ways to keep your profit margins happy and healthy.  

Step 1. Set red flags and measure

To detect where costs could be out of sync with the rest of the business, use accounting or industry software to track costs, alerting you to when action needs to be taken. Setting ‘red flag’ levels can warn of any cost blowouts. “Investing in inventory management software can be counter-intuitive when you’re trying to reduce costs, but these systems can help improve business efficiency and save money in the long-run,” says Brian Ballman, AVP, Business Development in CWB's Mississauga Banking Centre. “These systems can often be financed and can pay for themselves in short order.”

If you’re not sure what signals to measure, consider industry indicators, for example:

  • Retail red flags: web and foot traffic, gross margin percentage, discounting, average sale per salesperson and weekly revenue.
  • Construction red flags: work in progress, building consents, open tenders, employee productivity, supply chain delays, cost of materials.
  • Professional services red flags: bookings or demos, client numbers, revenue per employee, net profit percentage, average revenue per client.
  • Agriculture red flags: market prices, long-term weather forecasts, climate change legislation, yield and productivity.

Benchmarking these metrics against your industry and competitors can help you stay above the industry average.

Step 2. Collaborate to share costs

Collaboration through strategic alliances or joint ventures can have major cost benefits, including advantages and opportunities that may be harder or cost more on your own. They include:

  • Sharing marketing product development by exchanging information, research, employees, expertise, distribution networks and resources to increase your reach and impact.
  • Working on new ideas, dividing up what needs to be done, sharing the cost.
  • Adding a new business partner. A partner can bring new markets, channels, consumers and clients.
  • Building reciprocal web links between businesses, referrals and recommendations to complementary products or services, often used by professional services.
  • Promotional discounts or bundling products and services together, common with complementary retailers and online providers.
Keep your local Chamber of Commerce or business network in mind too, say Trevor Palmer, AVP, Business Development in CWB’s Edmonton South District. “Not only can these networks be a great source of free advice and support, but they may also open opportunities for discounts and cost-sharing if you have similar focuses.”

Step 3. Lower variable costs

Finding ways to reduce what you pay for raw materials, components, or employees who work directly on output will have a significant impact on optimizing your costs. This assumes that any cost reductions will maintain the quality and service your clients expect.  List your direct costs from the most to the least, select the top ten and then see if you can:

  • Source cheaper suppliers. “One way to accomplish that is to get numerous suppliers and vendors to provide quotes,” says Ballman. “Having this information on hand will put you in a better position to negotiate with your current suppliers.”
  • Ask existing suppliers to renegotiate deals, offer early payment discounts, or review more favorable terms. It’s never too late to ask.
  • Switch out an ingredient or component for a more cost-efficient alternative, without compromising quality.
  • Change your product mix, and stop selling products that are more expensive to service or produce.
  • Use retail group discounts from chambers or industry associations, which often provide discounts and secure rates that are beyond the buying power of individual businesses.
  • Widen your supplier base and consider importing from cheaper sources especially in industries that are vulnerable to wild swings in costs or shortages, such as construction and building.
Lastly, consider to buy in bulk, which often comes with a volume discount. “This is a tried and true cost-saving approach, but if you’re financing it, make sure to have a discussion with your banking partner well in advance of the order,” says Palmer.

“There are a few things to consider. What’s the shelf life of the product? Are the goods perishable, and what’s the plan if they don’t sell? This can be risky if you’ve agreed to pay up front then repay over time.” Bulk-buying might again introduce an opportunity to share costs, even with a competitor. “This can lessen your upfront costs while still positioning you for the discount,” explains Palmer.

Step 4. Use government grants or subsidies

You may be eligible for financial assistance through national or provincial government initiatives. There are wage subsidies and a range of business tax credits and funds, so use the Government of Canada’s Business Benefits Finder to identify what you may be entitled to.

Additionally, each province has agencies devoted to help local business. Contact them. A few examples:

If you have a research component to your business, Ballman recommends investigating Scientific Research and Experimental Development (SR&ED) tax incentives as well.

Step 5. Modify your business model or product

Shifting more of your business online can lower your delivery costs. The growth of online marketplaces  means a business no longer needs its own channel to market or find customers.

Consider these additional ways of selling to lower your costs:

  • Drop shipping; selling the product while another business holds the inventory and ships it to your customer.
  • On-demand; delivering only when ordered, such as for printing and books.
  • Resource sharing (for example, Uber and Airbnb)

Step 6. Reduce your overhead commitments

Decide if you can lower your overhead while still operating effectively. Identify your highest overhead costs and applying cost-saving tactics in areas where you’ll see the most reward. For example:

  • Sub-contract if you find yourself needing to scale up fast. If you’re a construction business and get a new contract, you may consider lesser margin in return for lowering your long-term commitment to permanent overhead.
  • Discontinue a product line or service if it’s sold infrequently and expensive to maintain. For example, if you need extra warehouse space, dedicated employees, or machinery that needs replacing to keep an underperforming product in the market, plan to phase-out the product.
  • Conduct an audit spot wastage from inefficient processes or shrinkage from theft or poor management of consumables.
  • Switch manual processes to digital operations and streamline your business with digitization or automation.
  • Pinpoint inefficient costs such as cutting down on energy costs or getting rid of obvious overcapacity, such as unused phones, subscription costs and computer equipment.
Consider a contract or fractional arrangements for important but costly employee positions, like your Chief Financial Officer. “These are great for growing companies that need that oversight and expertise but not someone in a full-time position,” says Ballman.

Summary

Business owners should look to optimize costs on a regular basis. Set up systems to signal if costs are exceeding an acceptable limit, then take steps to get them under control. Lean on the expertise of your accountant, financial partner, or industry adviser to keep you accountable to financial targets. With specialized support at your side, you’ll be able to identify areas of concern, systems and benchmarks to keep you on track.

Palmer also encourages his clients to lock in costs whenever possible and have cash on hand to take advantage of a cost-saving opportunity. “If you find yourself presented with an unexpected surge in demand or major sale, think strategically about how that money can provide some stability in an unpredictable market. That cash can go toward things like a bulk purchase of important materials, new technology, or long-term debt. A banking partner is a crucial source capital for growing businesses, but it’s always smart for businesses to have a reserve fund.”

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Next steps

  • Consider involving your in ways to cut costs, they may contribute creative ideas. You might give them incentive to suggest cost-saving ideas, or you can simply ask what causes them problems reduces their efficiency. Employees are more likely to co-operate with cost-control initiatives if you explain the reasons for changes and the benefits to the business.
  • Explore places where you can purchase materials at a wholesale rate.
  • Consider adopting new software and technology that can help you manage your expenditure.
  • Contact your banking partner. CWB’s business banking teams are specialized in answering financial questions related to your business.